Student Lending: Wall Street's Next Bubble?

Amanda Winston, a junior at Temple University in Philadelphia, juggled three jobs and an unpaid internship this summer in an effort to keep her head above water financially while continuing to make key contacts in the public relations field that she hopes to call her own once she graduates.

Tiffany Black, an aspiring veterinarian and biology major at City College in New York, wants to start paying off a student-loan bill that she anticipates will be in the tens of thousands of dollars before she completes her education. But she has not been able to land a job since she started looking in May.

Cynthia Jones, a divorced mother of three and a part-time student at John Tyler Community College, just outside Richmond, Va., is confident that her studies will lead to the higher-paying job of her dreams -- and allow her to pay off more than $14,000 in student loans.

"I'm sure I will be able to pay off my loans when I finish school," Jones said. "There are payment-plan options. They really help you."

A Looming Crisis

But the sheer number of students with outstanding loans has credit-rating firm Moody's Analytics worried. Winston, Black and Jones are just three of the approximately 35 million people nationwide who have outstanding federal student loans.

As of March 30, outstanding student loans totaled about $805 billion, according to the U.S. Department of Education, which administers the loans. Rising tuition costs, a soft job market and troublingly low graduation rates at many schools cast doubt on whether a growing number of people will be able to pay those loans back.

In a July report (pdf), Moody's opined that students' inability to pay back their loans could cause the next economic crisis in the U.S. According to the Education Department, default rates are on the rise nationwide, standing at 7 percent as of September 2010 (the latest figure available), up from 6.7 percent the year before.

Moody's expressed special concern about students at for-profit proprietary schools, which include many trade and online universities, and where graduation rates are typically lower than those of traditional colleges and the loan-default rate is higher. Minorities make up a majority -- about 54 percent -- of students enrolled at these schools, said Education Department spokeswoman Sara Gast.

For proprietary schools, the student-loan default rate as of September 2010 was 11.6 percent, up from 11 percent the year before. Low graduation rates, high tuition costs and training in fields that are in lower demand are among the reasons people attending these schools can't meet their obligations, according to Moody's.

Minority Groups Most at Risk

With unemployment at a staggering rate of 15.9 percent for African Americans (the national unemployment rate hovers at around 9 percent), the bursting of a bubble in student lending could be especially hard on the black community.

A 2010 study by the College Board Advocacy & Policy Center (pdf) found that student-loan debt levels of $30,500 or higher were more common among black bachelor's degree recipients (27 percent) than among their white (16 percent), Latino (14 percent) or Asian (9 percent) counterparts.

Plus, "More black students have student loans and have higher unemployment rates, so the debt level is more consequential," said political economist Dr. Jessica Gordon Nembhard in an email. Nembhard is an associate professor of community justice and social economic development in the department of African-American studies at John Jay College in New York City. "With the increase in the economic downturn, black unemployment levels will stay high or get worse."

That reality drives Winston, who already owes $15,000 in loans, to do what she can while still in college to help secure future employment.

"I've done internships, I'm vice president of Temple University's Black Public Relations Society, a member of the Philadelphia Black Public Relations Society. I've been involved with the working class outside of campus," she said. "People know who I am. I'm establishing relationships now that will hopefully carry me into my first job."

And that's important because by the time Winston, 19, of the Bronx, N.Y., completes her degree in public relations, she expects to be at least $20,000 in the hole. And her loans are not her only expenses -- she must also pay for housing. Winston holds a part-time job during the school year while taking a full load of classes and maintaining her involvement in the public relations organizations.

"I'm used to little sleep," Winston said.

Which Careers Are in Demand?

Black, 19, of Queens, N.Y., does not want to lose sleep thinking about future debt, so she wants to tackle her student loans now.

"During undergrad, I want to start paying it off," said Black, who owes about $18,000 in loans as she begins her junior year in September. "I'm trying to find a job now, but I have been looking since May and have come up short."

Black would like to increase her experience working with animals by gaining employment at a veterinary clinic or pet shop, but at this point she is willing to take a retail, food-industry or clerical job. "Many places want two to three years' experience, or they don't want to speak to you," she said.

But Black is confident that her investment in her education is worth it. "People are obsessed with their pets, so there's always a need to have vets," she said. "I should be able to get a job somewhere."

Whether her degree was linked to a viable job was a key consideration for Jones, a 40-year-old divorced mother of three, before she decided to incur student-loan debt and return to school.

"I needed to do something different," Jones said. "I was an instructional assistant in the school system in Richmond. I was salaried, making, like, $17,000, $18,000 per year, but I was putting in about 55 hours a week. If you averaged out everything I did, all hours, I was probably making $5.50 an hour."

Jones did some research and found out that the starting pay for nursing jobs in her area was $14.50 an hour. She returned to school to become a licensed practical nurse. She racked up a student-loan debt between $14,000 and $18,000, but her education paid off with a better-paying job.

"As soon as I got out of school, within a week, I was working at a nursing home," Jones said. "I was happy to be working and making a decent salary."

She has taken advantage of the ability to defer payment of her loans while she attends community college part time. She hopes to earn an associate's degree in human services to further her career goal of working with pregnant teens in a group-home setting.

Jones said that her investment in her education has been worth it, but aligning the realities of the job market to one's education goals is important.

"You see a lot of college graduates flipping burgers," she said. "How are you going to get paid to do what you like? That's what you need to figure out."

Moody's would add this piece of advice: "Unless students limit their debt burdens, choose fields of study that are in demand and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place."

Dara Sharif is a New York-based editor, writer and graduate student. Follow her on Twitter.